Chapter 6: Q21_5B (page 711)
Why does a progressive tax code produce a retirement annuity for a middle-class household that is similar to that which would follow from a flat tax?
To make retirement benefits sustainable to lower income groups too.
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What type of investors would be interested in a target date retirement fund?Why?
Return again to the previous problem. Now suppose that the manager misestimates thebeta of Waterworks stock, believing it to be .50 instead of .75. The standard deviation ofthe monthly market rate of return is 5%.
a. What is the standard deviation of the (now improperly) hedged portfolio?
b. What is the probability of incurring a loss over the next month if the monthly marketreturn has an expected value of 1% and a standard deviation of 5%? Compare youranswer to the probability you found in Problem 16.
c. What would be the probability of a loss using the data in the previous problem if themanager similarly misestimated beta as .50 instead of .75? Compare your answer tothe probability you found in the previous problem.
d. Why does the misestimation of beta matter somuch more for the 100-stock portfoliothan it does for the 1-stock portfolio?
Question: The following is part of the computer output from a regression of monthly returns on Waterworks stock against the S&P 500 Index. A hedge fund manager believes that Waterworks is underpriced, with an alpha of 2% over the coming month.
a. If he holds a \(3 million portfolio of Waterworks stock and wishes to hedge market exposure for the next month using one-month maturity S&P 500 futures contracts, how many contracts should he enter? Should he buy or sell contracts? The S&P 500 currently is at 1,000 and the contract multiplier is \)250.
b. What is the standard deviation of the monthly return of the hedged portfolio?
c. Assuming that monthly returns are approximately normally distributed, what is the probability that this market-neutral strategy will lose money over the next month?
Assume the risk-free rate is .5% per month.
A plan sponsor with a portfolio manager who invests in small capitalization, high-growthstocks should have the plan sponsor’s performance measured against which one of thefollowing?
a. S&P 500 Index.
b. Wilshire 5000 Index.
c. Dow Jones Industrial Average.
d. Russell 2000 Index.
A clearly written investment policy statement is critical for:
a. Mutual funds.
b. Individuals.
c. Pension funds.
d. All investors.
Which of the following statements reflects the importance of the asset allocation decisionto the investment process? The asset allocation decision:
a. Helps the investor decide on realistic investment goals.
b. Identifies the specific securities to include in a portfolio.
c. Determines most of the portfolio’s returns and volatility over time.
d. Creates a standard by which to establish an appropriate investment time
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